E-Alert Case Updates

Court Awards Nearly $1,000,000 in Attorney’s Fees to Breaching Party

The issue in this case was whether an employee who breached the duty of loyalty of an employment contract was still entitled to seek enforcement of other provisions of the contract, including an award of attorney’s fees. In holding that the employee could recover attorney’s fees, a divided Court of Appeals upheld a nearly $1,000,000 attorney fee award. Judge Greene wrote the majority opinion, with Judge Adkins and Judge Murphy dissenting.

The facts of the case involved a manager leaving her former employer real estate agency for employment with a new real estate agency, and in the meantime, recruiting 67 of the 82 total agents from the former agency to join her. Upon the exodus of the majority of its workforce, the former employer sued the manager for breach of contract, and for the breach of the duty of loyalty, which is an implied term in every contract. The employment contract she signed when she initially joined the company contained a non-solicitation clause, as well as a clause pertaining to attorney’s fees. The attorney’s fees provision provided that if the company prevailed in litigation, then the manager was required to reimburse the company for attorney’s fees, and vice versa.

At trial, the jury found that the manager breached the duty of loyalty, and awarded $250,000 to the employer. However, the jury found that the employee did not violate the non-solicitation clause in the contract. Consequently, the trial court awarded the manager/employee attorney’s fees based on the employer’s failure to prevail on the non-solicitation clause claim. On appeal, the Court of Special Appeals affirmed. On a second review, the Court of Appeals affirmed.

First, the Court of Appeals noted that for the employer to be released from performing under the contract, the breach of the duty of loyalty on the part of the employee must be “material.” Here, the breach was never deemed to be material based on the Court’s review of the jury verdict sheet, and therefore, the employer could not be excused for performance under the contract.

Second, the employee’s breach of the duty of loyalty did not result in a forfeiture of her rights under the contract, including the non-solicitation clause and attorney’s fees. The non-solicitation clause presented separate, divisible rights and obligations than the remainder of the contract, and thus a breach of the implied duty of loyalty did not necessarily affect those separate rights.

Finally, the Court of Appeals held that it did not matter that the employee was indemnified by her new employer in defending the lawsuit, as the employee had still “incurred” attorney’s fees based on the terms of the contract. The term “incur” included fees generated on behalf of the party, whether the party was personally liable for the services rendered.

The dissenters commented that they could not “endorse the majority’s conclusion that an employee who violates the ‘fundamental’ duty of loyalty can still benefit from the employment contract that she so egregiously breached.” To the dissenters, because the duty of loyalty was breached, the Court should have assumed that this was a “material” breach, which would allow the employer to suspend its performance under the contract.